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MORNING BID-Counter-attack: unleash the bulls and back to reflation!

·2 min read

A look at the day ahead from Julien Ponthus

It did take investors a few sessions to decide what to make of the Fed's sudden hawkish turn last week but the overnight rally on Wall Street sent a loud and clear signal: counter-attack, unleash the bulls and back to reflation!

The Dow just completed its strongest session in over three months with cash piling back in to energy and other sectors expected to outperform as the economy rebounds from the pandemic.

That was a stark reversal from last week, when the Fed's tougher stance on inflation and projections for its first two rate hikes into 2023 sparked a violent bout of profit taking that wiped out value stocks and triggered the worst weekly performance for the Dow and the S&P 500 in months.

The Fed's new stance also boosted the dollar and flattened the Treasury yield curve but these moves have also partially reversed.

The U.S. 10-year yield, which had fallen to a February low of about 1.36% on Monday, bounced back just south of 1.50%.

It's fair to say though that with markets seemingly ready to switch narratives in a heartbeat, all eyes and ears will be on Federal Reserve speakers.

Investors are now waiting for Chairman Jerome Powell, due to speak before Congress at 1800 GMT as well as several other key Fed officials throughout the week.

History buffs will be closely watching his words as a similar testimony by his predecessor Ben Bernanke in 2013 triggered the famous "taper tantrum" selloff in global markets.

At stake are the billions of dollars betting on the reflation trade which has been the driving force of markets in recent months.

Meanwhile, European and Wall Street stock futures are in a bullish mode this morning with Asian markets bouncing from four-weeks lows.

Key developments that should provide more direction to markets on Tuesday: -UK government borrowing falls in May -Dutch economic growth expected to recover faster -Sweden, Finland May unemployment rates -ECB speaker corner: Lane, Schnabel -Euro zone consumer confidence data for June -Italy industrial sales April -U.S. housing data including existing homes sales for May

(Reporting by Julien Ponthus, editing by Saikat Chatterjee)